Interest rates held at 0.5% five years on but speculation mounts over when recovery will force a rate rise

Interest rates were kept at 0.5 per cent yet again today - five years to the week after they were first slashed to their all-time low.

The Bank of England's policymakers surprised no one by holding rates today - although speculation has been mounting over when the burgeoning recovery will force the monetary policy committee into making the first hike.

Andrew Goodwin senior economic adviser to the EY ITEM Club, expects the Bank to remain cautious, only raising interest rates once the resilience of the recovery is assured.

Rate rise: Bank of England Governor Mark Carney hinted the first rise since July 2007 could come early next year but insisted any increases will be 'gradual' and 'limited'

'We expect this to occur in 2015 Q3.
And while some commentators fear that low interest rates are inflating a
housing bubble, these concerns are overblown. Moreover, interest rates
would be a poor choice of instrument to guard against a house price
bubble.

'The minutes due to be released later
in March will clarify exactly how the Bank’s thought process has
changed since the transition to phase two of forward guidance. The MPC
members have all spoken with one voice over the past month, and we would
hope that the next set of minutes would provide a window into any
differences of opinion between them.

'We expect to see more narrative
surrounding the finer details of the UK economy, particularly on the
level of spare capacity, an issue which is likely to provoke some debate
with the committee.'

Rates have been at 0.5 per cent ever
since March 2009 – much to the misery of prudent savers – in a desperate
attempt to kick-start growth and prevent another recession. But 2013 was the best year for the UK since 2007 and 2014 is expected to be even better.

The ‘experts’ cannot decide and this has prompted a media blitz from the Bank’s monetary policy committee. The charm offensive was launched after a sharp fall in unemployment left Governor Mark Carney’s pet project of forward guidance in tatters after just six months.

The Canadian promised in August last year that a rate rise would not be considered until the jobless rate fell from 7.8 per cent to 7 per cent – something he did not expect until late 2016.

But by the time the Bank presented its inflation report last month it had fallen to 7.1 per cent – prompting a rapid change of tack.

Carney hinted the first rise since July 2007 could come early next year but insisted any increases will be ‘gradual’ and ‘limited’.
He raised the prospect of rates only rising to 2 per cent by early 2017 and staying at between 2 per cent and 3 per cent until around 2020. He also said rates will not return to the 5 per cent average seen before the financial crisis any time soon.

‘The MPC will not take risks with the recovery,’ he said.
Chief economist Spencer Dale went a step further when he said it was ‘reasonable’ to believe rates will remain ‘on hold until about the spring of next year’ before rising.
This was bang in line with the view on the financial markets that rates would rise in April 2015 and reach 2 per cent in late 2016.

Carney himself said that – based on the Bank’s current forecasts – inflation will be just below the 2 per cent target and the economy running at close to full capacity if rates rise as the market expects.

Economists believe the biggest risk to this outlook is wages.
A strong pick-up, without an increase in productivity, could force the Bank into an early hike to keep a lid on inflation.

The General Election in May 2015 is also likely to play a role with both the April and May meetings of the MPC deemed too close to polling day to act.
But while the MPC will, sensibly, not say exactly when the first rate hike will be, its overriding message is that rates will not return to pre-crisis levels of around 5 per cent.

It is a message unlikely to please borrowers hooked on low rates or savers crying out for a decent rate of return.

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Interest rates held at 0.5% five years on but speculation mounts over when recovery will force rise in borrowing costs